It’s Time for a Little Catching Up

Sales Trail: Transaction volume slowed for the 12-months ending June 30, as compared to the 12-month period ending March 31, declining about $15 billion on a sequential basis from $235 billion to $220.3 billion. Many causes come to mind, ranging from uncertainty regarding the path of the global economy to a dearth of quality offerings to the prices that sellers are demanding, to fear regarding the prospect of a “fiscal cliff” to, well, you get the idea. This is not to say that $220 billion is not a righteous number nor that the market is not likely to surpass last year’s total of $211 billion. They are; this is merely a warning that it is time to exercise care and caution.

CMBS Flourishes: Analysts and conduit management see issuance of commercial mortgage-backed securities reaching as much as $40 billion this year as borrowers try to take advantage of recent narrowing in spreads charged by securitized lenders. As we said last week, “It’s the yield” that’s driving capital into CMBS paper and lowering yields. In fact, the 10-year super-senior AAA-rated bonds in the most recent CMBS offering were priced 10 basis points narrower at Swaps plus 85 basis points that did a similarly rated tranche priced the week before. U.S. issuance, as of last Friday, equaled $29.3 billion as compared to $25.2 billion in 2011.  Total U.S. issuance last year equaled $32.7 billion. Given the number of deals moving through the structuring pipeline, $40 billion seems achievable. Standard & Poor’s noted in the September 18th issue of its “Structured Finance Research Update” a prediction of $45 billion of CMBS issuance in 2013, citing low long-term interest rates and tight spreads.

What’s an Insurance Company to Do? On the one hand, many insurance companies see CMBS spreads as too tight to be attractive and have decided to sit this out for a while, until risk-adjusted rates of return go back to what they believe are more normalized levels. We are not 100 percent sure what a normalized level is, but intuit that super-senior AAA-rated CMBS bonds priced at Swaps plus 85 basis points just does not do it. This is certainly true if your target is lending in the range of  200 basis points over 10-year Treasuries. One insurance company executive noted that he would rather take the risk involved in underwriting the entire physical asset than have the liquidity associated with the top portion of the financial asset.

And if not having anything to invest in werent’t enough of a problem, insurance companies are finding CMBS lenders becoming more competitive as the recent tightening in trading spreads is being translated into lower costs for the borrower. Interest rates on CMBS loans has declined to 4 percent to 4.25 percent, down as much as 50 basis points in the past two months, thereby bringing CMBS loans into competition with insurance company interest rate floors currently in the 3.5 percent to 4 percent range. If you combine this with the propensity of CMBS lenders to provide greater proceeds, you can see that CMBS lenders are becoming increasingly competive.

Monday’s Numbers

The Trepp, LLC survey showed commercial mortgage spreads coming in a few basis points during the survey period as securitized lenders reduce spreads to borrowers, reflecting the benefit of the recent rally in the most creditworthy CMBS bonds. Institutional lenders continue to utilize floor pricing in the sub-4 percent range, reflecting a more competitive lending environment.

Asking Spreads over U.S. Treasury Bonds in Basis Points
(10-year Commercial and Multifamily Mortgage Loans with 50% to 59% Loan-to-Value Ratios)

12/31/09

12/31/10

12/31/11

9/14

Week Earlier

Month Earlier

Office

342

214

210

230

234

238

Retail

326

207

207

223

227

229

Multifamily

318

188

198

214

216

222

Industrial

333

201

205

221

227

229

Average Spread

330

203

205

222

226

230

10-Year Treasury

3.83%

3.29%

1.88%

1.63%

1.64%

1.65%

The Cushman & Wakefield Equity, Debt, and Structured Finance Commercial Mortgage Spread monthly survey of commercial mortgage spreads showed spreads for 10-year, fixed rate mortgages, coming in five to 10 basis points.

Property Type

Mid-Point of Fixed Rate Commercial Mortgage
Spreads For 5 Year Commercial Real Estate Mortgages

12/31/10

5/30/12

6/28/12

7/26/12

9/3/12

Multifamily – Non-Agency

+270

+250

+245

+245

+240

Multifamily – Agency

+280

+210

+225

+225

+225

Regional Mall

+280

+300

+300

+295

+290

Grocery Anchored

+280

+295

+295

+290

+285

Strip and Power Centers

 

+320

+320

+315

+310

Multi-Tenant Industrial

+270

+305

+305

+300

+295

CBD Office

+280

+295

+300

+295

+285

Suburban Office

+300

+315

+315

+315

+305

Full-Service Hotel

+320

+360

+360

+360

+360

Limited-Service Hotel

+400

+370

+370

+370

+370

5-Year Treasury

2.60%

0.69%

0.69%

0.57%

0.68%

Source: Cushman & Wakefield Equity, Debt, and Structured Finance.

Property Type

Mid-Point of Fixed Rate Commercial Mortgage
Spreads For 10 Year Commercial Real Estate Mortgages

12/31/10

5/30/12

6/28/12

7/26/12

9/3/12

Multifamily – Non-Agency

+190

+220

+220

+220

+210

Multifamily – Agency

+200

+190

+200

+210

+210

Regional Mall

+175

+245

+245

+235

+230

Grocery Anchor

+190

+230

+235

+230

+225

Strip and Power Centers

 

+260

+255

+250

+245

Multi-Tenant Industrial

+190

+260

+260

+255

+250

CBD Office

+180

+250

+250

+245

+235

Suburban Office

+190

+270

+265

+265

+260

Full-Service Hotel

+290

+295

+290

+290

+290

Limited-Service Hotel

+330

+320

+310

+310

+310

10-Year Treasury

3.47%

1.62%

1.58%

1.42%

1.64%

Source: Cushman & Wakefield Equity, Debt, and Structured Finance.

Property Type

Mid-Point of Floating-Rate Commercial Mortgage
Spreads For 3 – 5 Commercial Real Estate Year Mortgages

12/31/10

5/30/12

6/28/12

7/26/12

9/3/12

Multifamily – Non-Agency

+250-300

+200-250

+200-260

+200-260

+200-260

Multifamily- Agency

+300

+220-265

+220-265

+220-265

+220-265

Regional Mall

+275-300

+210-275

+210-275

+210-275

+210-275

Grocery Anchored

+275-300

+205-275

+210-275

+210-275

+210-275

Strip and Power Centers

 

+225-300

+225-300

+225-300

+225-300

Multi-Tenant Industrial

+250-350

+235-305

+235-305

+230-305

+230-305

CBD Office

+225-300

+225-300

+225-300

+225-300

+225-300

Suburban Office

+250-350

+250-325

+250-325

+250-325

+250-325

Full-Service Hotel

+300-450

+275-400

+275-400

+275-400

+275-400

Limited-Service Hotel

+450-600

+325-450

+325-450

+325-450

+325-450

1-Month LIBOR

0.26%

0.24%

0.24%

0.24%

0.24%

3-Month LIBOR

0.30%

0.47%

0.47%

0.46%

0.43%

* A dash (-) indicates a range.

Source: Cushman & Wakefield Equity, Debt, and Structured Finance.

Year-to-Date Public Equity Capital Markets

DJIA (1): +11.15%
S & P 500 (2): +16.11%
NASDAQ (3): +22.06%
Russell 2000 (4):+15.48%
Morgan Stanley U.S. REIT (5):+13.81%

 (1) Dow Jones Industrial Average. (2) Standard & Poor’s 500 Stock Index. (3) NASD Composite Index.
(4) Small Capitalization segment of U.S. equity universe. (5) Morgan Stanley REIT Index.

U.S. Treasury Yields

12/31/10

12/31/11

9/22/12

3-Month

0.12%

0.01%

0.10%

6-Month

0.18%

0.06%

0.14%

2 Year

0.59%

0.24%

0.26%

5 Year

2.01%

0.83%

0.67%

7 Year

 

 

1.13%

10 Year

3.29%

1.88%

1.75%

         

Key Rates (in Percentages)

 

Current

1 Mo. Prior

3 Mo. Prior

6 Mo. Prior

1 Yr. Prior

Fed Funds Rate

0.16

0.15

0.17

0.15

0.10

Federal Reserve Target Rate

0.25

0.25

0.25

0.25

0.25

Prime Rate

3.25

3.25

3.25

3.25

3.25

US Unemployment Rate

8.10

8.30

8.20

8.30

9.10

1-Month Libor

0.22

0.24

0.25

0.24

0.23

3-Month Libor

0.37

0.43

0.47

0.47

0.36